Exam 9: Basic Oligopoly Models

In Gelate, Pennsylvania, the market for compact discs has evolved as follows: There are two firms that each use a marquee to post the price they charge for compact discs. Each firm buys CDs from the same supplier at a cost of $5.00 per disc. The inverse market demand in their area is given by P = 10 - 2Q, where Q is the total output produced by the two firms. a. Solve for the Bertrand equilibrium price and market output. b. Would your answer differ if the products were not perfect substitutes? Explain.

Two firms compete as a Stackelberg duopoly. The inverse market demand they face is P = 62 - 4.5Q. The cost function for each firm is C(Q) = 8Q. The outputs of the two firms are:

Which would you expect to make the highest profits, other things equal?

The inverse demand in a Cournot duopoly is P = a - b(Q₁ + Q₂), and costs are C₁(Q₁) = c₁Q₁ and C₂(Q₂) = c₂Q₂. The government has imposed a per-unit tax of $t on each unit sold by each firm. The tax revenue is:

The Cournot theory of oligopoly is based on the assumption that each firm believes that rivals will:

The Cournot theory of oligopoly assumes rivals will:

One of the characteristics of a contestable market is that:

An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which of the following is most likely?

Both firms in a Cournot duopoly would enjoy lower profits if:

Consider two firms competing to sell a homogeneous product by setting price. The inverse demand curve is given by P = 15 - Q. Firm 1 has MC₁(Q₁) = 1 and firm 2 has MC₂(Q₂) = 1.05. Based on this information, we can conclude that the market price will be:

Zelda Industries is the only firm of its kind in the world. Due largely to historical accident, it began producing streganomas in 1985 in a vacant warehouse. Virtually anyone with a degree in college chemistry could easily replicate the firm's formula, which is not patent protected. Nonetheless, since 1985 Zelda has averaged accounting profits of 6 percent on investment. This rate is comparable to the average interest rate that large banks paid on deposits over the period. Do you think Zelda is earning monopoly profits? Why?

The profits of the leader in a Stackelberg duopoly:

A decrease in firm 2's marginal cost will cause:

Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The profits of the two firms are:

Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q₁ - 2Q₂. Each firm has a marginal cost of $50. Based on this information, we can conclude that aggregate quantity in the different equilibrium oligopoly models will follow which of the following orderings?

Firm A has a higher marginal cost than firm B. They compete in a homogeneous product Cournot duopoly. Which of the following results will NOT occur?

"An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is:

A firm's isoprofit curve is defined as the combinations of outputs produced by:

An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What kind of oligopoly does the firm most likely belong to?

Which of the following are price-setting oligopoly models?